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At this point, a firm must often choose how to access financial capital. It may choose to borrow from a bank, issue bonds, or issue stock. The great disadvantage of borrowing money from a bank or issuing bonds is that the firm commits to scheduled interest payments, whether or not it has sufficient income. The great advantage of borrowing money is that the firm maintains control of its operations and is not subject to shareholders. Issuing stock involves selling off ownership of the company to the public and becoming responsible to a board of directors and the shareholders.

The benefit of issuing stock is that a small and growing firm increases its visibility in the financial markets and can access large amounts of financial capital for expansion, without worrying about paying this money back. If the firm is successful and profitable, the board of directors will need to decide upon a dividend payout or how to reinvest profits to further grow the company. Issuing and placing stock is expensive, requires the expertise of investment bankers and attorneys, and entails compliance with reporting requirements to shareholders and government agencies, such as the federal Securities and Exchange Commission.

Key concepts and summary

Companies can raise early-stage financial capital in several ways: from their owners’ or managers’ personal savings, or credit cards and from private investors like angel investors and venture capital firms.

A bond is a financial contract through which a borrower agrees to repay the amount that was borrowed. A bond specifies an amount that will be borrowed, the amounts that will be repaid over time based on the interest rate when the bond is issued, and the time until repayment. Corporate bonds are issued by firms; municipal bonds are issued by cities, state bonds by U.S. states, and Treasury bonds by the federal government through the U.S. Department of the Treasury.

Stock represents ownership of a firm. The stock of a company is divided into shares. A firm receives financial capital when it sells stock to the public. A company’s first sale of stock to the public is called the initial public offering (IPO). However, a firm does not receive any funds when one shareholder sells stock in the firm to another investor. The rate of return on stock is received in two forms: dividends and capital gains.

A private company is usually owned by the people who run it on a day-to-day basis, although it can be run by hired managers. A private company owned and run by an individual is called a sole proprietorship, while a firm owned run by a group is called a partnership. When a firm decides to sell stock that can be bought and sold by financial investors, then the firm is owned by its shareholders—who in turn elect a board of directors to hire top day-to-day management—and is called a public company. Corporate governance is the name economists give to the institutions that are supposed to watch over top executives, though it does not always work.


The Darkroom Windowshade Company has 100,000 shares of stock outstanding. The investors in the firm own the following numbers of shares: investor 1 has 20,000 shares; investor 2 has 18,000 shares; investor 3 has 15,000 shares; investor 4 has 10,000 shares; investor 5 has 7,000 shares; and investors 6 through 11 have 5,000 shares each. What is the minimum number of investors it would take to vote to change the top management of the company? If investors 1 and 2 agree to vote together, can they be certain of always getting their way in how the company will be run?

Got questions? Get instant answers now!


National Venture Capital Association. “Recent Stats&Studies.” http://www.nvca.org/index.php?option=com_content&view=article&id=344&Itemid=103Update.

Freddie Mac. 2015. “Freddie Mac Update: March 2015.” Accessed April 13, 2015. http://www.freddiemac.com/investors/pdffiles/investor-presentation.pdf.

Former, Jamie D. “Should Your Small Business Go Public? Consider the Benefits and Risks of Becoming a Publicly Traded Company.” U.S. Small Business Administration: Community Blog (blog) . Publication date March 23, 2010. http://www.sba.gov/community/blogs/community-blogs/business-law-advisor/should-your-small-business-go-public-consider-0.

Questions & Answers

how environment affect demand and supply of commodity ?
Amos Reply
Wht at the criteria for market ?
what is difference between monitory policy and fiscal policy?
Malik Reply
monetary policy is a policy thrust by National Govt(CBN) to influence government spending, purchase &taxes
necessity of economics
Pamela Reply
I will say want,choice,opportunity cost,scarcity,scale of preference
what is monopoly market.How price output are determined under monopoly market
b) Monopoly market is an impecfect market where s single firm having the innovation to produce a particular commodity.Prices are determined through output since there are no other competitive.
Monopoly market:firm has market power & does not respond to market price
Explain the process of price determination under perfect competition market with suitable diagram
bisham Reply
Price determination under perfect competition via this process :firms have no market power to influence price rather firms respond to market price.
price is different from demand- demand is amount of commodity
Effah Reply
demand is amount /quantity of commodity a potential buyer is willing to buy at a given price at market
demand is a desire of customer on commodity with the ability to pay it and willing to buy it at given price of commodity
demand is price of what
Faith Reply
show that shortrun average cost
Baby Reply
what is economics
Mbah Reply
what is money
what is money
Difine macro economics
money is a medium of exchange between goods and services,maybe inform of currency.
Economics is study of how human beings strive to satisfy numerous wants using limited available resources.
how do you find the maximum number of workers the firms should employ order to produce where there are increasing returns
what are implications of computing national income?.
what is the formulae for calculating national income
it calculated by value added method
classify the production units like agriculture, banking, transport etc
money is anything that is generally acceptetable for human
Estimate the net value added(NVA) at fixed cost by each industrial structure
definition of unemployment
Adam Reply
what are the causes of unemployment?
Mbubi Reply
The main causes of unemployment are listed below. 1. Frictional unemployment 2. Cyclical unemployment 3. Structural unemployment
We can also categorize the causes on a broader sense as: 1. Political and 2. Social cause As unemployeement root causes are embaded in this two.
would opportunity cost exist if there was no scarcity?
yes just because the opportunity cost arose when there is Alternative to choose among the alternatives.
I am thinking that, if our resources were unlimited, then there wouldn't be any need to forgo some wants. Hence the inexistence if opportunity cost
politics has done what?
consider time assani
I'm Emmanuel,...I taught the main cause is the change in gov't.
...Lack of capital to set up a firm respectively
I would like to bring in Educational levels can also be the cause the cause of the problem respectively
lack of skills among the new generation is the serious issue.
Where I come from , I don't see why education or personal aspects seem to do with unimployment, technically the motivation and eigerness in all works of live is there , dispite the cultural influence and physical bearriors;the thing we lacking is Government Support and open market ethics.
sorry about that-(repation). We have a over powering ethical political system that's displacing the marketing asspects of economy and causing large scale unemployment right across the board...
can someone Explain Expansionary Monetary Policy and Contractionary Monetary Policy Using one of the instrument of Monetary Policy? Please am kinda lost here?. ta
Emmanuel Reply
using a graph show the case of substitute and compliment goods
Ade Reply
can anyone give me a simple explanation to Five Sector Macroeconomics?
Can someone please define what economics is
jason Reply
economics simply is a social science subject that study human behavior.
economics is a social science which studies human behaviour as a relationship between ends and scarce means that has alternative uses
Can someone please tell me how to calculate GDP
emmanual kapal to calculate GDP (Gross Domestic Product) has three method in calculating it (1)income approach (2) expenditure approach (3) value added method
thanks Alae
u are welcome
in basic terms economics is revered to as battery system, it date back to when Men sees the need to exchange sapless goods and produce to gain , either wealth , basic necessities or to establish trading ties for personal benefit or social asspects in terms of coexistence and continuity, future .
what is the law of demand
Berlinda Reply
keep other thing constant, when the price increases demand decrease when the price decreases demand increases of the commodity.
all things being equal,quantity demanded decrease as price increase and increase as price decrease
there's practial joke to it ..." the higher the demand ; scarcity, increase in production and drop in quality"... quite the controversy - for example China vs Europe, United States and we are all boxed up in between somewhere...
Other thing remain constant the low price of commodity the high quantity of commodity and vice versa is true
Explain Effective demand
Anita Reply
What is effective demand
like Modi is in demand...best example of effective demand
Don't get you
Anita you mean you don't get me or who?
level of demand that represents a real intention to purchase by people with the means to pay

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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